Investors Warn of ‘Rot in Private Equity’ as Funds Strike Circular Deals

What’s happening in the buy‑out market?

Buy‑out firms are finding it increasingly difficult to sell the companies they have acquired. Rather than exiting through traditional sales, many funds are resorting to a circular transaction – effectively selling the assets back to themselves in order to return cash to their investors.

Why the shift?

The current market is marked by low valuations and a scarcity of willing buyers. As a result, private‑equity managers are under pressure to demonstrate liquidity to limited partners (LPs) who expect regular distributions. The “sell‑to‑self” approach provides a shortcut: the fund closes a deal on paper, records a nominal profit, and then redistributes the proceeds to its investors.

Investor concerns

Limited partners have begun to voice alarm, describing the practice as a sign of “rot in private equity.” Critics argue that these transactions mask the true health of portfolios, inflate performance metrics, and could expose both funds and investors to legal and reputational risks.

Regulatory and ethical implications

Regulators are watching the trend closely. While the deals are technically legal—since the selling and buying entities are often separate legal shells—their substance can be questionable. “It looks like a financial sleight‑of‑hand,” said one compliance officer, highlighting the potential for conflicts of interest and the need for greater transparency.

What the future may hold

If the market does not rebound, the practice could become more widespread, prompting calls for stricter disclosure rules and perhaps a re‑examination of the fee structures that incentivize such maneuvers. For now, investors are urging fund managers to focus on genuine exits rather than engineered transactions that merely shuffle money around.